USDJPY rally, UK Q1 GDP flat

Forex News and Events

More upside in JPY

Japans retails sales rebounded to 0.4% m/m after a concerning collapse of -1.8% the prior month.
However, the recovery was still below estimated of a 1.1% increase. Events have aligned to push the USDJPY higher. On the USD front, US data positive momentum has now started to support the Fed’s theory of transitory economic weakness. Solid core durable goods combined with hawkish Fed members’ comments should be evidence to USD bulls that a September rate hike remains on the table. In Japan, minutes from the BoJ monetary policy committee meeting indicates that the current rate of expansion remains appropriate. In addition, Chief Government Spokesman Suga delivered with semi-official approval of yen weakness, by stating that JPY decline has not reached undesirable levels. In our view, the USDJPY remains the most direct way to trade the global policy divergence theme. News emulating from Japan should motivate carry traders to further use JPY to fuels their yields seeing ambitions, extending bullish momentum to 126.

GBP Referendum shadow

Today, UK Q1 GDP has printed at 0.3% q/q. It has not been revised higher as it was anticipated to go to 0.4% q/q from 0.3% q/q first estimate. The increase in the anticipation was likely due to positive contributions from investment and domestic consumption. Britain has relied on domestic demand for its economic recovery as the strong GBP vis-à-vis the EUR, has hurt competitiveness. The weak trade performance has pushed up Britain's current account deficit to its highest levels on record. Yesterday, the Queen’s speech outlined policies of the new Conservative-majority government including the biggest elephant in the room, the EU referendum. The Queen’s speech stated that Britain will hold an in or out referendum on its EU membership before the end of 2017. An earlier report that the referendum would be held in 2016 looks to have been incorrect (although there are no hard timelines yet). Business leaders have been vocal that the uncertainty caused by the EU referendum has slowed investment inflows. With opinion polls suggesting that UK voters would back staying in the EU, eliminating major disruption, a quick resolution would have been a positive for UK businesses. Now the GBP will be sensitive to any comments or polls. In addition, there is a growing sense that Scotland is drifting away, further creating uncertainty for the UK’s future.

Strong USD

We remain committed to a September Fed rate hike. The weak data and dovish Fed had tested our resolve but there are now signs September lift off is likely. Last week’s CPI inflation report where core increased by 1.8% indicates that the economy is still humming along. Capacity pressure on the labor market is building and it’s only a matter of time before we see wage growth. Then we got verbal support from Chair Yellen. An unusual hawkish Yellen stated that “it will be appropriate at some point this year to take the initial step to raise the federal funds rate”. Investors needs to come to terms with the new lower normal for US growth especially considering the weaker global climate. With the US the nearest to steadily creating inflation they are the most likely to increase interest rates. We remain bullish on USD as we head towards September.

USDJPY - Setting a 13-year high